Here’s Minnesota’s latest 2- and 3-year default rates on student loans, as compiled by the state Office of Higher Education (OHE).

The data was released rather quietly late last week by the U.S. Department of Education, and state analyst Tricia Grimes was able to release her work yesterday. The office should release the final report in the weeks to come.

Two sets of developments seem to be at play this year:

1) Under the standard measuring system, Minnesota’s default rates have inched up a bit more than the national average did this year; and

2) A new measuring system has begun. Its first results have caused default rates to jump across the board — even though nothing has changed at the schools themselves.

Let’s start with #1 and what it shows.

Closing gap

Under the standard measuring system, Minnesota’s (2-year) student-loan default rate increased from 5.8 percent in 2009 to 6.9 percent in 2010. That new number is still below the national average of 9.1 percent.

But that increase was sharper than the national increase of 8.8 to 9.1 percent, leading state Office of Higher Ed Director Larry Pogemiller to tell me:

“The demographics of Minnesota are starting to look a lot more like the national demographics — more lower and moderate-income people trying to access post-secondary education as a percent, which leads me to the notion that we really should do something in terms of financial aid to help that growing group.”

For-profit vs. 2-year public colleges

OHE officials also highlighted the differences in default rates between Minnesota’s for-profit sector and its two-year community and technical colleges.

Nationally, public-two years tend to have better default rates. But in Minnesota, it’s just the opposite. Here, public two-years had average 2-year default rates of 11.7 percent in 2010 vs. 5.6 percent for two-year for-profits and 6.8 percent for 4-year for-profits.

State officials couldn’t explain why, but said Minnesota’s career-college sector is long-established and perhaps more regulated than those in other states.

A new measurement

So far, nothing really new or dramatic.

But let’s look at the second development.

This year marked the first time the feds came out with the official results of a new measurement: the three-year default rate.

Here’s how state and federal education officials explained the change:

Apparently, officials thought most people who defaulted on their student loans would do so within two years of leaving school (with or without a degree).

But they came to believe that many more defaulted after that period, so the old measurement didn’t really give an accurate picture. Expanding their look to the first three years would do a much better job.

A 2011 OHE report referenced a 2009 Chronicle of Higher Education article that gave another reason:

Congress adopted the three-year window after some lawmakers argued that many institutions and their partner lenders, whose eligibility for the federal program is also tied to default rates, were avoiding declaring a borrower in default until just after the two-year measuring period had passed.

Of course, increasing the period by 50 percent (an extra year) means more time for something bad to happen to a borrower — loss of a job, an expensive illness, etc. — so default rates naturally go up across the board.

So that 5.8 percent default rate for Minnesota for for 2009 is suddenly 9 percent under the three-year measurement.

And the U.S. default rate rises from 8.8 percent to 13.4 percent — a greater increase than Minnesota’s. Notice, too that most of Minnesota’s peer states in the Big 10 have seen their default rates jump by greater margins as well.

So then is Minnesota actually increasing its lead over the national and regional average, or narrowing? Hard to say at this point.

Consequences

So why is this new measurement important?

For most schools, it shouldn’t make much of a difference, other than they’ll have to face grimmer, more realistic figures.

For some, though, it could carry some consequences.

Federal authorities say colleges whose three-year default rates meet or exceed 30 percent could face default-management plans, and state analyst Tricia Grimes said schools could lose their access to financial aid if they hit 30 percent or higher for three years in a row.

The highest three-year default rates come from Hibbing Community College (25.3 percent), Mesabi Range Community and Technical College (25 percent), Cosmetology Careers Unlimited in Hibbing (31.2 percent) and Duluth Business University (26.7 percent).

Grimes says she thinks those schools may have the highest rates because they’re in an economically tougher areas that suffer from higher unemployment, on average, than the rest of the state.

Only Cosmetology Careers Unlimited breached the 30 percent limit. But owner Richard Shaffer told me his school has only 16 students, and so is too small to be held to the same standard as others.

(The idea is that any change in an individual student could disproportionately affect the rating of the school as a whole. That leads to wild percentage swings even though the changes are small.)

Schaffer says future default rates will be averaged in with this year’s, and that chances are he’ll have more time than most to bring his rate down. He said he has already employed a third-party loan-default counselor, which should improve the situation.

He told me:

“My take is that we’ll have that percentage down next year, so it’ll be a non-issue.”

Grimes says many of the loan defaults are preventable, but borrowers aren’t aware of their options. Many students, for example, have access to:

– income-based repayment plans;

– loan-forgiveness plans for teachers, government workers and nonprofit workers; and

– deferment plans for those who are unemployed or experiencing financial difficulty.

You can find default rates for individual schools in the report above.

About the blogger

Alex Friedrich reports on higher education issues for MPR News. Among the stories he has covered: the fall of the Berlin Wall, aftermath of Hurricane Katrina, collapse of the I-35W bridge in Minneapolis, 2003 Moscow suicide bombing and 2004 presidential elections in the Republic of Georgia. He holds a bachelor’s degree in journalism from the University of Georgia and a master’s in European political economy from the London School of Economics.